Becoming a Non-Resident of Canada – Liability for Canadian Income Tax Depends on Residence
The determination of “residence” is not always easy. Becoming a non-resident means severing residential ties with Canada, beginning with the “dwelling place”. Liability for Canadian income tax depends upon “residence”, a question of fact to be determined on a case by case basis.Difference Between Canada and the United States for Determining Whether Income Is Taxable
Under the Canadian Income Tax Act, citizenship does not determine liability for tax. A Canadian resident is liable to pay income tax in Canada on his worldwide income.
To become a non-resident, a resident must decisively break with Canada.
According to Canadian Revenue Agency’s Interpretation Bulletin IT-221R3,
“The most important factor to be considered in determining whether or not an individual leaving Canada remains resident in Canada for tax purposes is whether or not the individual maintains residential ties with Canada while he or she is abroad.
While the residence status of an individual can only be determined on a case by case basis after taking into consideration all of the relevant facts, generally, unless an individual severs all significant residential ties with Canada upon leaving Canada, the individual will continue to be a factual resident of Canada and subject to Canadian tax on his or her worldwide income.”
“Residential ties” are determined by looking at the facts.
If the individual has a “dwelling place”, can they use it at will? If it is leased to an arm’s-length third party on ordinary commercial terms, that is a weaker tie than if the property is available to the individual.
Spouse, Common-Law Partner, and Dependants
Has the individual’s family left Canada with him? If the spouse, common-law partner or other dependants have remained, the tie to Canada is stronger.
Secondary Tests of Residence
If the dwelling place and family ties do not conclusively establish whether the taxpayer is still a resident of Canada, there are further questions. These are less individually persuasive, but may collectively tip the balance.
The secondary tests include:
* personal property still owned and left in Canada
* social ties (e.g. recreational and religious)
* economic ties (e.g. employment, banking, credit cards)
* landed immigrant or work permit for Canada
* hospitalization and medical insurance from a province of Canada
* Canadian driver’s license
* Canadian vehicle registration
* seasonal dwelling place, or a dwelling place that is leased out
* Canadian passport
* membership in a Canadian union or professional organization.
Even where an individual is physically absent from Canada for long periods of time, if they have not severed all their residential ties, the courts have “overwhelmingly” found that they are still “ordinarily resident” in Canada.
When a person living abroad maintains residential ties with Canada, the decision about whether they are “ordinarily resident” in Canada has to be made. The significance of the individual’s particular ties is considered, looking at:
* whether there is evidence of an intention to permanently sever residential ties with Canada
* the regularity and length of visits to Canada and
* residential ties outside of Canada.
For each of these, there is a discussion and elaboration in the Interpretation Bulletin.
There Is No Formula for Determining Whether Someone Is a Canadian Resident for Tax Purposes
The question of residence is the starting point for determining liability for Canadian income tax. There is no objective, mechanistic formula. Residence is a question of fact, to be determined by looking at the various factors.
Note: Readers in need of specific advice should consult their personal tax advisor and not rely solely on this article.